Dipak K. Sen, J.
1. This reference arises out of the assessment of Nandlal Kanoria, the assessee, to income-tax in the assessment year 1969-70 for which the previous year ended on the 31st March, 1969. The relevant facts found and/or admitted are shortly as follows :
2. The assessee is an individual. A large number of shares in North Bihar Sugar Mills Ltd. (hereinafter referred to as 'the company') were owned by the assessee and the members of his family and they had substantial interest in the company within the meaning of Section 2(32) of the I.T. Act, 1961.
3. During the relevant period, the assessee obtained two loans from a sole proprietary concern, Indira & Co., respectively, of Rs. 75,000 on the 30th July, 1968, and of Rs. 2,00,000 on the 2nd September, 1968. At the assessment, the ITO brought on record a certificate issued by Indira & C6. to the effect that the said sum of Rs. 75,000 had been paid out of a loan received from the company and that the said sum of Rs. 2,00,000 was similarly paid out of another loan received from the same source. From the accounts of Indira & Co., the ITO found that on the 31st August, 1968, the assessee had repaid an amount of Rs. 1,00,000 by cheque to Indira & Co., and that on the same date the latter had issued a cheque in favour of the company. On the 2nd September, 1968, a sum of Rs. 4,75,000 was entered as advanced by the company to Indira & Co. out of which a cheque for Rs. 2,00,000 was issued by Indira & Co. in favour of the assessee. Subsequent repayment by the assessee was recorded and the entire loan was repaid by the 5th February, 1969. The ITO came to the conclusion that the repayment of Rs. 75,000 by the assessee to Indira & Co. and the corresponding repayment by Indira & Co. to the company were mere book entries, the net effect of the transactions being that the loan was enhanced from Rs. 75,000 to Rs. 2,00,000. The ITO found that the said amount represented a loan advanced by the company in an indirect way to the assessee and as such was dividend within the meaning of Section 2(22) of the I.T. Act, 1961, in the hands of the assessee. Deducting the gross dividend actually received by the assessee from the company, the ITO added back an amount of Rs. 1,73,750 as deemed dividend to the income of the assessee.
4. Being aggrieved, the assessee preferred an appeal. The AAC found that the payments made by the company to Indira & Co. were made on behalf of the former's shareholders and that such payments were solely for the individual benefit of the assessee. The AAC also found that the business of the company was manufacture and sale of sugar and molasses and not money-lending for which it had no licence and as such the assessee could not claim the statutory exemption provided by the said s. 2(22) of the Act and upheld the assessment.
5. The assessee preferred a further appeal before the Income-tax Appellate Tribunal and contended that there was no loan or advance directly by the company to the assessee. It was contended further that the first loan had been granted by the company to Indira & Co. in the ordinary course of its business. Funds from different sources had blended in the hands of Indira & Co. as recorded in its accounts and as such payments by the company to Indira & Co. were not for the benefit of the assessee. The loans to the assessee were made by Indira & Co., and it could not be said that Indira & Co. received any amount from the company for the benefit of the assessee.
6. It was contended on behalf of the revenue on the other hand that the real intention of the assessee and Indira & Co. would be evident from the fact that against or in respect of the sum of Rs, 75,000 received from the company, Indira & Co. issued a cheque for the same amount in favour of the assessee. It was submitted that Indira & Co, was the conduit pipe through which the loan came from the company to the assessee and, therefore, this amount must be treated as dividend.
7. The Tribunal found that Rs. 75,000 was received by Indira & Co. from the company and the same amount had been paid to the assessee. This indicated that this was a payment by the company meant for the benefit of the assessee. In respect of the second transaction involving Rs. 2,00,000 the Tribunal noted that Indira & Co had received on the same day amounts both from the company as also from another concern, viz., United Provinces Sugar & Co. Ltd., and that after the receipt of the funds from the said two sources this loan was made to the assessee. The Tribunal proceeded on the basis that the onus lay on the assessee to prove that the amount of Rs 2,00,000 did not come from the amount advanced by the company to Indira & Co. The Tribunal concluded as follows:
' In this case, there was special nature of debt of the assessee in respect of payment made by the company to the assessee. The situs of the debt of the assessee was in the books of account of Indira & Co, in the form of payment of equivalent amount by the company to Indira & Co. Indira & Co. has shifted by entries in books this debt to the books of the assessee.'
8. On an application of the assessee under Section 256(1) of the I.T. Act, 1961, the Tribunal had drawn up a statement and referred the following questions of law for the opinion of this court:
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 1,73,750 could be treated as deemed dividend within the meaning of Section 2(22)(e) of the Income-tax Act, 1961, and as such could be included in the total income of the assessee ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 8,114 could be allowed as a permissible deduction in terms of Section 57(iii) of the Income-tax Act, 1961?'
9. At the hearing Mr. Pranab Pal, learned counsel for the assessee, drew our attention to Section 2(22) and 2(32) of the I.T. Act, 1961, to which we may refer at this stage :
'2. (22) 'Dividend' includes--.....
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
but 'dividend' does not include--.....
(ii) any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company.'
'2. (32) 'Person who has a substantial interest in the company', in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent. of the voting power.'
10. Mr. Pal contended that the said Section 2(22) which brought to tax a deemed income should be strictly construed and unless it was found specifically that money had been advanced or lent by the company to the assessee the first part of the section would not come into operation. The Legislature had expressly excluded the words 'directly' or 'indirectly' from the said section as in other sections of the Act, namely, Sections 60 and 64. He submitted that the assessee would not come within the mischief of the section only on the finding that a loan or advance had been made indirectly by the company to the assessee.
11. Mr. Pal contended further that the admitted case being that the money was initially advanced by the company to a third party by way of a loan would preclude the operation of the second part of the said section, viz., that it was a payment for the individual benefit of the assessee. He also contended that a loan can in no sense confer any benefit to the borrower because it entailed the liability to repay the principal and to pay interest. He submitted lastly that there was no finding by the Tribunal that Indira & Co. was a conduit pipe through which money came from the company to the assessee. In support of his contentions, Mr. Pal cited several decisions which we shall consider hereafter.
(a) India Cements Ltd. v. CIT : 60ITR52(SC) . This decision was cited for the following observation of the Supreme Court (p. 63):
'...the loan obtained is not an asset or advantage of an enduring nature.'
(b) CIT v. Rameshwarlal Sanwarmal : 82ITR628(SC) . The facts in the case were, inter alia, that in the relevant assessment years certain loans had been advanced to a HUF by a company. It was found that the karta of the family held certain shares in the said company in his capacity as karta. The question arose whether these loans could be deemed to be dividends under Section 2(6A)(e) of the Indian I.T. Act, 1922, which was in pari materia with Section 2(22)(e) of the I.T. Act, 1961. The Supreme Court held that the loans would not come within the mischief of the said section as the loans had been given to the HUF which was not the shareholder.
(c) CIT v. C. P. Sarathy Mudaliar : 83ITR170(SC) . Here the members of a HUF acquired shares in a company with the funds of the family Loans were granted by the company to the family and the question arose whether the loans could be deemed as dividend and treated as income of the family under Section 2(6A)(e) of the Indian I.T. Act, 1922, The Supreme court held that only loans advanced to shareholders could be deemed to be dividends under the relevant section and as the HUF was not and could not be registered as a shareholder, loans given to it could not be considered as loans advanced to a shareholder and could not, therefore, be deemed to be its income. The relevant observations of the Supreme Court are, inter alia, as follows (p. 173):
'Section 2(6A)(e) gives an artificial definition of 'dividend '. It does not take in dividend actually declared or received. The dividend taken note of by that provision is a deemed dividend and not a real dividend. The loan granted to a shareholder has to be returned to the company. It does not become the income of the shareholder. For certain purposes, the legislature has deemed such a loan as 'dividend '. Hence, Section 2(6A)(e) must necessarily receive a strict construction. When Section 2(6)A(e) speaks of 'shareholder', it refers to the registered shareholder and not to the beneficial owner. The Hindu undivided family cannot be considered as a shareholder either under Section 2(6A)(e) or under Section 23A or under Section 16(2) read with Section 18(5) of the Act. Hence, a loan given to a Hindu undivided family cannot be considered as a loan advanced to a 'shareholder' of a company.'
(d) G. R. Govindarajulu Naidu v. CIT : 90ITR13(Mad) . This decision of the Madras High Court was on facts entirely different from the facts before us and the judgment is of little assistance in the instant case.
(e) ITO v. Chandmull Batia : 115ITR388(Cal) . In this case this court followed C. P. Sarathy Mudaliar : 83ITR170(SC) and held that where a public limited company gave loans to two of its registered shareholders who were partners in a firm, the loans could not be deemed to be dividend in the hands of the firm as the firm was not the registered shareholder of the company.
(f) CIT v. Rajendra Prasad Moody : 115ITR519(SC) . This decision of the Supreme Court in our view is not of much assistance in the facts and circumstances of the instant case so far as the first question is concerned.
12. Mr. Suhas Sen, learned counsel for the revenue, contended on the other hand that in the instant case it could not be disputed that the original loan or payment was from the company and the ultimate recipient of the amounts was the assessee. He relied on the entries in the books of Indira & Co., showing the account of the assessee where in respect of each item a specific source was indicated. He also relied on the certificates issued by Indira & Co. Mr. Sen submitted that the findings of the Tribunal which were findings of fact had not been challenged on behalf of the assessee and, therefore, according to him, the matter stood concluded. In particular, he contended, it had been found by the Tribunal:
(a) that there was a payment by the company, namely, in making to Indira & Co. ;
(b) that the said payment was meant for the benefit of the assesses.
13. He contended that on these unchallenged facts the second part of Section 2(22)(e) of the I.T. Act, 1961, was attracted.
14. Mr. Sen contended further that the object of the section was to prevent the controlling shareholders from receiving accumulated profits of a company in preference to other shareholders and, therefore, the expression 'loan and advance' in the first part of the section must be construed to include indirect loans and advances, i.e., transactions which are really loans and advances to the shareholders but made through a device in the instant case by passing the amounts through the books of a third person. Insupport of his contentions Mr. Sen cited several decisions which we shall consider hereafter.
(a) Navnit Lal C. Javeri v. K. K. Sen, AAC : 56ITR198(SC) . In this case the Supreme Court considered whether Section 2(6A)(e) of the Indian I.T. Act, 1922, and Section 12(1B) were ultra vires art. 19 of the Constitution thereof and observed as follows (pp. 202, 208):
'It is thus clear that the combined effect of these two provisions is that three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable dividend to the extent of the accumulated profits held by the company. These three kinds of payments are : (1) payments made to the shareholder by way of advance or loan; (2) payments made on his behalf ; and (3) payments made for his individual benefit...
Section 12(1B) provides that if a controlled company adopts the device of making a loan or advance to one of its shareholders, such shareholders will be deemed to have received the said amount out of the accumulated profits and would be liable to pay tax on the basis that he has received the said loan by way of dividend. It is clear that when such a device is adopted by a controlled company, the controlling group consisting of shareholders have deliberately decided to adopt the device of making a loan or advance. Such an arrangement is intended to evade the application of Section 23A. The loan may carry interest and the said interest may be received by the company; but the main object underlying the loan is to avoid payment of tax. It may ultimately be repaid to the company and when it is so repaid, it may or may not be treated as part of accumulated profits. It is this kind of a well-planned device which Section, 12(1B) intends to reach for the purpose of taxation.'
(b) CIT v. Durga Prasad More : 82ITR540(SC) . This decision was cited for the following observation of the Supreme Court (p. 545):
'A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.'
(c) Smt. Tarulata Shyam v. CIT : 108ITR345(SC) . The facts in this case were that the assessee, a shareholder and the managing director of a company in which the public were not substantially interested, had withdrawn in cash from time to time various amounts. Parts of the said amounts had been adjusted against the outstanding dividend and ultimately a sum remained to the debit of the assessee in the books of the company. During the relevant accounting period the assessee paid back to the company part of the amount outstanding. The question arose whether the net amount outstanding during the accounting period could be treated as dividend in the hands of the assessee under Section 2(6A)(e) of the Indian I.T Act, 1922. The Supreme Court held that tax was attracted to the said loans and advances to the extent to which the company concerned had accumulated profits from the moment the loan or advance was received by the shareholders. Even if such loan or advance ceased to be outstanding at the end of the previous year it will still be deemed to be dividend if the other conditions of Section 2(6A)(e) were satisfied. The following observations of the Supreme Court at pages 356 and 357 were relied on :
'...the language of Sections 2(6A)(e) and 12(1B) is clear and unambiguous. There is no scope for importing into the statute words which are not there. Such importation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation.
To us, there appears no justification to depart from the normal rule of construction according to which the intention of the legislature is primarily to be gathered from the words used in the statute.....
Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be.....the legislature has deliberately not made thesubsistence of the loan or advance, or its being outstanding on the last date of the previous year relevant to the assessment year, a pre-requisite for raising the statutory fiction. In other words, even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed as a 'dividend' if the other four conditions factually exist, to the extent of the accumulated profits possessed by the company.'
(d) CIT v. L. Alagusundaram Chettiar : 109ITR508(Mad) . The facts in this case were that the assessee held substantial shares and was the manging director of a company, targe amounts were advanced by the company to a HUF whose karta was an employee of the company having only two shares and large advances were made by the family to the assessee from such funds on interest. Before the ITO, the assessee admitted that the company granted, such loans only to the employee and that the assessee took loans only from the employee. The amounts borrowed by the employee without security, were admittedly advanced to the assessee almost immediately in toto. On these facts, the Madras High Court held that the transactions embodied payment for the benefit of the assessee and as such Section 2(6A)(e) of the Indian I.T. Act, 1922, was attracted and the amount was taxable as deemed dividend in the hands of the assessee.
(e) Lastly, Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) was cited where the Supreme Court quoted with approval the following observation of Jenkins L. J. in Dames v. Shell Company of China Ltd.  32 TC 133, 157 ;  22 ITR (Supp) 1 (CA):
'As loans it seems to me they must prima facie be loans on capital, not revenue account; which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital.'
15. In the instant case, it appears to us that the amounts of the two loans received by the assessee, namely, Rs. 75,000 and Rs. 2,00,000 can certainly be taxed in the hands of the assessee as deemed dividend if it can be established that the said amounts were either loans and advances from the company to the assessee or that the payments of Rs. 75,000 and Rs. 4,80,000, respectively, by the said company were meant for the benefit of the assessee.
16. Neither the AAC nor the Tribunal has found that the said amounts, namely, Rs. 75,000 and Rs. 2,00,000, were received by the assessee from the said company by way of loan or advance. It is also not found that Indira & Co. was a benamidar or that the company was advancing the amounts in fact to the assessee. The theory of an indirect loan or advance which has been urged on behalf of the revenue is difficult to conceive. A loan creates a legal relationship between two parties, namely, the lender and borrower. It does not appear to us that on the facts before us it can be said that this relationship came into existence between the assessee and the company nor it can be said that there was any loan or advance by the said company to the assessee which the said company could in law recover from the assessee. From the decisions cited the law appears to be well settled that the section concerned has to be construed strictly. In that view it will not be correct to construe the said section by importing the expression 'directly or indirectly' in connection with the expression 'by way of advance or loan to a shareholder' as appearing in Section 2(22)(e) of the Act of 1961.
10. The only question which remains to be considered is that whether the said company made the payments of the said sum of Rs. 75,000 and Rs. 4,80,000 to Indira & Co. for the benefit of the assessee. So far as Rs. 75,000 is concerned it is found by the Tribunal, though not very clearly, that this amount was received by Indira & Co. from the said company and the same amount was given to the assessee by Indira & Co. The Tribunal inferred from the said facts that this was a payment by the said company meant for the benefit of the assessee. This conclusion involves two findings of fact, namely, the factum of payment by the company and the motive or intention of the company making such payment, namely, a benefit accruing to the assessee. These are essentially findings of fact and have not been challenged by the assessee by an appropriate question.
18. We are unable to entertain the other contention of Mr. Pal that a loan is never a benefit. A person obtaining money on loan does derive a benefit at least to the extent of the user of the borrowed fund. A loan undoubtedly gives rise to liabilities, e.g., to repay the money borrowed and in certain cases to pay interest thereon. But it cannot be said that a loan does not confer any benefit to the borrower. The conclusion of fact that a benefit accrued to the assessee in respect of Rs. 75,000 paid by the company to Indira & Co. has become final and, therefore, this payment comes within the mischief of Section 2(22)(e) of the Act, and must be deemed to be dividend in the hands of the assessee.
19. But the same conclusion was not arrived at in respect of the subsequent loan of Rs. 2,00,000 from Indira & Co. to the assessee. The Tribunal noted that before this amount was advanced, Indira & Co. had not only received Rs. 4,80,000 from the company but also another sum of Rs. 1,25,000 from United Provinces Sugar Co. Ltd. These two amounts received from two different sources blended in the hands of Indira & Co. and out of the blended fund a sum of Rs. 2,00,000 was advanced to the assessee. The Tribunal refrained from drawing the further conclusion that Rs. 4,80,000 paid by the said company to Indira & Co. or any part thereof was meant for the benefit of the assessee.
20. We have been unable to appreciate the observations of the Tribunal in this connection and its conclusions as to the situs of the debt or the shifting of entries in the books of Indira & Co. or the relevancy of the same in the controversy before us. We hold that the said sum of Rs. 2,00,000 lent by Indira & Co. to the assessee cannot be said to fall within the mischief of Section 2(22)(e) of the I.T. Act, 1961.
21. Accordingly, we answer question No. 1 partly in favour of the revenue and partly in favour of the assessee. We hold that the Tribunal was right in holding that the amount of Rs. 75,000 should be treated as deemed dividend and included in the total income of the assessee on proper computation and that it erred in treating the other amount of Rs. 2,00,000 as deemed dividend. Similarly, question No. 2 should also be answered partly in favour of the revenue. The amount of interest paid in respect of only Rs. 75,000 will not be allowed as deduction. As to the balance amount the Tribunal will consider the matter on merits and determine if the same would be a permissible deduction under the relevant sections of the Act. The reference is disposed of accordingly.
22. In the facts and circumstances of the case, there will be no order as to costs.
C.K. Banerji, J.
23. I agree.